![]() ![]() How much? Should amount to no more than 0.10% to 0.20% of invested capital, will usually be stated in an absolute dollar amount with a hard cap. ![]() Admin Fees and ExpensesĪs it sounds, these are the annual costs to maintain the investment vehicle that are passed through to investors, including accounting, legal, entity fees to the government, and taxes. These fee terms are typically predetermined in the original closing documents of the platform investment, so be informed. According to a study by Dechert and Prequin back in 2011, 70% of firms charge closing fees for add-on acquisitions bolted onto an investment. When the sponsor rolls their fees into equity, the investor pays $100 even in cash but their stake becomes 24.25%.Ī final consideration on closing fees is whether they apply also to add-on acquisitions. When they pay fees in cash, they paid an extra $3 but their stake was 25%. Let’s replay the example with this scenario:įrom an individual investors’ perspective, it’s clear a dilution takes place. Essentially, the sponsor is earning sweat equity for putting the deal together. ![]() Because a rolled fee becomes a stake in the operating company, it does not accrue the hurdle and will not be paid back to investors. Rolling means that instead of payment in cash, the sponsor converts their fee sum into equity inside the deal, alongside investors. Now, there may be a twist: a sponsor may choose to ‘roll’ their fees. In addition, the sponsor leads the diligence efforts to deeply understand the financials, operations, contracts, competitive landscape, growth prospects, and every other aspect driving the value of a business targeted for investment, incurring expenses at their own risk before a deal comes to fruition. Sponsors can spend years courting a company before convincing the founders and management team to move forward. Why? To compensate for upfront work required to effect a transaction. When? Upon closing, when capital is deployed into a deal. The mention of bankers brings us to quickly distinguish ‘banker fees’ as happening at closing on the other side of the table, usually paid by the seller (we see as the target company from the buy side) to the investment banks that are hired to help sell the owners sell the business, often through an auction process. How much? 1-2% of total deal size, often stated as a flat number and broken into expense reimbursement for the hard costs incurred and, secondly, compensation for their efforts in putting the deal together (this piece can be more pointedly called the ‘deal fee’).Ī deal fee in addition to expense reimbursement is especially common on deals without a banker, as the sponsor contributes extra value by finding the company through proprietary sources like personal relationships and not an auction. Let’s explore each type of fee on a hypothetical $100 investment, investing into a $600 deal with $400 equity and $200 debt.Ĭlosing Fee, Transaction Fee, Deal Fee: Really All the SameĬlosing fee, transaction fee, and deal fee are all synonymous words for the fees paid at closing by investors to the sponsor for getting an opportunity over the finish line. In other words, first make investors whole plus a baseline rate of return, then everyone can share the riches.Ī standard hurdle is 8% as an approximate benchmark for public markets, reasoning that investors invest in the private markets to beat public market returns. Upon the exit of a deal, the fee amounts and initial investment plus their preferred rate of return must be paid back to investors before the sponsor can participate in the upside. Generally, unless ‘rolled’ or otherwise stipulated, all fees paid out by investors accrue the hurdle. Hurdle rate – the preferred rate of return is called ‘the hurdle’, usually 8% compounding annually, accrued on outflows, both initial investment and fees paid by the investor, which must be paid back to investors before a sponsor can earn any carried interest.Underpinning the fee payment structure is the fee repayment structure, where a fifth and very important number, the ‘hurdle rate’, comes to counterbalance. Carried interest – to provide strong incentives for good deal outcomes, the “performance fee”.Management fees – to “keep the lights on” at the sponsor’s entity.Administrative fees – a pass-through of entity maintenance costs.Closing fees – to compensate for upfront work required to effect a transaction.To design a fair and solid fee structure on a direct deal, we must first know the nature of each type of fee, asking how much, when, and why.Īs a general matter, four types of compensation to the sponsor may apply: The structures bend and sway because no two deals are exactly alike and no two investors are exactly alike, causing fee arrangements to vary widely and creatively. ![]() Like all equations of supply and demand, the fees on a direct private transaction are the outcome of a negotiation. ![]()
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